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Improvements and Redemption

Remember, if someone redeems after an Alabama tax sale or a foreclosure, and if they are liable for improvements the investor has made, they are liable for the VALUE of those improvements, not just the COST.

Foreclosure investors are entitled to the value of all improvements, whether they are repairs, upgrades, and/or a brand new structure added to the property. There is no limitation as to property type.

Tax sale investors are entitled to only preservation improvements, and even that is only if the property contains a residential structure. They are not entitled to upgrades or brand new structures. There is an exception for properties located in specifically designated blighted areas, but that’s outside the scope of this post.

To make the point about VALUE perfectly clear, let’s look at an example. Depending on the market, the house in the photo might be worth around $15,000. A tax sale investor replaces rotten siding, other rotten wood, and makes interior repairs. The cost adds up to $8,000.

BUT…

Once the repairs are finished, the house can be sold for $40,000. The preservation improvements COST was $8,000, but they increased the value of the property by $25,000. The value of the preservation improvements is $25,000. That is what must be paid (in addition to the taxes and interest) in order to redeem.

Don’t forget that you are also entitled to interest on the increased value, at 12% per annum. This is to protect you as the property value increases over time. The value of the improvements is calculated as of the date they are completed. If several years go by, the property will be worth even more. But, you are entitled to only the value on the date of completion, plus 12% per annum interest.

The same principle applies to foreclosures and all improvements after foreclosure and before redemption.

Many of you are leaving money on the table by asking for only your costs when a former owner asks to redeem. Don’t cry over spilled milk. Just resolve to do better in the future.

12Comments

according to your theory – lokewise, a tax sale purchaser spenfing $8000 to preserve a property but doesn’t increase the selling value is entitled to zip on reimbursement, even if the fair market value of the improvements that were made on the property, themselves, is $8000 – are payments for condo dues reimbursable as preservation improvements

what if i pay $8000 to preserve a property but the selling value doesn’t increase – do i get zero on redemption, even if the fair-market value of the repairs were also $8000 – what if i make payments for condominium dues – are they reimbursable – how bout payments toward recorded liens/mortgages/encumbrances?

Howie, we have to remember that the laws about tax sales are about balancing the interests of the investor and the taxpayer. The state wants to protect investors, otherwise it could never sell tax sale properties. But, it also wants to protect the taxpayer, who is a citizen of the state and owed protection, even if it does not pay property taxes. The state does not want people to lose valuable real estate over very small debts. Balancing these interests means that if an investor does something to make a property more valuable, it is only fair that the taxpayer pay for that increased value. After all, he didn’t pay his taxes and then redeemed back a piece of property in better shape than when he failed to pay his taxes. He ought to pay for that. BUT, if the investor makes improvements that do not increase the value of the property, then the taxpayer has gained nothing from the investor’s efforts. He should not have to pay for that.

I think payments for condo dues and lawn care are reimburseable, but no court has ruled on this. I think it is only fair and consistent with the theories behind tax sales. On the other hand, a court might say, “Just because it is consistent with the theory doesn’t mean we will allow it. Tax sale laws are matters of statutes. Statutes have to be strictly interpreted. If the legislature intended investors to get reimbursement for condo and HOA dues, and lawn care, it could have said as much. It did not. As a result, those things are not reimburseable.” I could argue either side of this with a perfectly straight face. The solution is to get the law changed.

Payments towards mortgage liens are not reimburseable. Using the same thinking as the condo dues, I could argue that payments to remove local government liens (which remain on the property even after a tax sale) should be reimburseable. On the other hand, they do not fit within the definition of preservation improvements. So, again, it’s a coin toss what a court will do and the best course is to get the law amended.

1. “The state wants to protect investors …” is true for the state legislature, but i have my doubts about the state courts – even when the proposed redemptioner is not an alabama citizen. If the value to be paid is the increase in value of the property, should a purchaser pay for independent appraisals before and after working on any property to be able to show the difference if the property is redeemed – am i making my risk by paying for improvements that are necessary to protect the property from detrioration but may not increase the appraisal – maybe purchasers should pay for an appraisal for every property as soon as they are purchased in order to protect themselves from proposed redemptioners who have gotten their own appraisals and charge the purchasers with waste if the second appraisal goes down, even if the purchaser has made improvements

2, i am not as concerned about making payments for mortgages, liens, and condo dues – if the property is redeemed by an owner who is liable for them because i believe i am an interested party and equity will allow me to be subrogated – its the redemption by someone who is not liable, such as a foreclosing first mortgagee

Denise, I have a question about how the initial value is determined before any improvements. For example lets say I buy the tax lien for a property assessed by the tax assessor for $50000, but the property has deteriorated to point where it would bring only $10000 if sold as is. Is the starting value before preservation improvements $50000 or $10000 or how is that determined?

It is $10,000. This is a proof problem, and what a court will find persuasive. Best way is with an appraisal. Second best way is to “back into” a value using the cost to repair, plus time value of money spent in repairs, plus what the market would charge for stuff you did yourself, plus a general contractor’s typical fee for a job that size, plus what profit an investor would expect to earn buying/fixing/flipping a property like that, and then subtracting all those figures from the “after” value. “After” values are pretty easy to figure out yourself because there are probably lots of comparable recent sales on MLS. On the other hand, I bet you’d have a hard time finding a recent sale of a trashed out house with the same number of bathrooms and bedrooms. There may be some danger in testifying as to value yourself for two reasons. One: how much credibility do you have that you’ve calculated it properly? and Two: Owners of real estate are legally allowed to testify as to its value. Someone who is not an owner would be giving an opinion based on facts, such as the conditions and size of the house. Anyone can testify as to facts, but only experts can testify as to opinions, except for that exception for owners of real estate. The problem is, if you have only a tax certificate, you are not an owner. A court might not allow you to testify as to value unless you can also be qualified as an expert–either as a real estate broker, or as an appraiser, or some other basis. 3rd party appraisals are always best. That’s the bottom line.

it has been said that the tax sale redemption statutes were taken from the mortgage foreclosure redemption statutes – 6-5-252 requires the foreclosure purchaser provide an itemized list of lawful charges – is a tax sale purchaser also required 2 provide an itemized list of preservation improvements?

The itemized list refers to the items which must be paid in conjunction with a bank foreclosure. There are more add-on charges than with a tax sale. That’s all. Itemized as to category, not within each category of things. Improvements are one category. Insurance is another category. Each year and that charges for that year and the interest per year is a separate itemization.

what a bag of worms if we ever have 2 go 2 court and both parties submit only a bottom line figure for the value of improvements from differing before and after appraisals – that would b a good time 2 say i am glad i ain’t a probate judge – especially since they don’t have equitable jurisdiction in counties with population less than 400,000 and in some counties, like madison, the probate judge ain’t even a lawyer (in some counties redemption is not even heard b4 a probate judge – some use revenue commissioners, tax collectors, or whoever the county appoints [maybe denise evans or howard ross – see ala code 40-10-127])